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4QFY11 results
Bhushan Steel’s (BSL) 4Q11 net profit at Rs2.9bn was up 34% YoY but 17%
below estimates due to lower than expected volumes and higher tax rate.
ASPs grew a strong 11% QoQ which drove a 23% QoQ growth in Ebitda/t to
US$299 – better than we estimated. The board’s approval for US$1bn capital
raising is a positive step towards balance sheet deleveraging. The key trigger
for the stock is the successful commissioning of expansion to 4.7mt by Oct-12.
Till then the stock remains high risk given high gearing. We see limited stock
return on a 12m view, but believe that the stock could double in 2-yrs on
commissioning of Phase-III expansion.
Strong profit growth in 4Q but below expectations
BSL reported 4Q Ebitda of Rs6.0bn - up 44% YoY but 8% below estimates as 4Q
sales volumes came in 18% below expectations. While the auto sector volumes
remained strong, there was some weakness in non-contractual off-take partly
because the company held on to the price hikes take in Jan-Feb. The management
has said that the volumes, adjusted for seasonal variations, have been good in
1Q12 and the company has not taken any price cuts since Mar-11. Higher than
expected tax rate in 4Q led to a bigger 17% miss at net profit.
Capital raising approval – a positive step towards de-leveraging
The board’s approval for up to US$1bn capital raising is a positive sign given that
high gearing has been a key concern for Bhushan’s stock. The management plans
to raise equity in 3Q12, which if successful would help reduce BSL’s net
debt/equity from 2.9x currently to 1.1x. Rising capex for Phase-III expansion and
the recently announced 1.8mtpa CR mill would otherwise keep net debt/equity
high at 2.1-2.7x over FY12-14.
Limited 12m upside but strong return potential on 2-year view
Post recent run up in stock price, we see limited upside in Bhushan stock over the
next 12m. However, on a 2-year view, we believe that BSL offers the highest
absolute return potential in the Indian metals space if the Phase-III expansion
gets commissioned by end-FY13 and the steel industry environment does not
worsen materially. In Phase III, Bhushan will expand primary steel-making
capacity to 4.7 mtpa (from 2.2mtpa) and downstream steel capacity to 1.7mtpa
(from 1.2mtpa) by Oct-12. This will drive strong 38% volume and 40% EBITDA
CAGR over FY13-15. We believe that the stock will factor in Phase-III expansion
only after 12-18m given macro and execution risks as well as high financial
leverage. We will revisit our estimates once full details are available in the FY11
annual report; retain BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
4QFY11 results
Bhushan Steel’s (BSL) 4Q11 net profit at Rs2.9bn was up 34% YoY but 17%
below estimates due to lower than expected volumes and higher tax rate.
ASPs grew a strong 11% QoQ which drove a 23% QoQ growth in Ebitda/t to
US$299 – better than we estimated. The board’s approval for US$1bn capital
raising is a positive step towards balance sheet deleveraging. The key trigger
for the stock is the successful commissioning of expansion to 4.7mt by Oct-12.
Till then the stock remains high risk given high gearing. We see limited stock
return on a 12m view, but believe that the stock could double in 2-yrs on
commissioning of Phase-III expansion.
Strong profit growth in 4Q but below expectations
BSL reported 4Q Ebitda of Rs6.0bn - up 44% YoY but 8% below estimates as 4Q
sales volumes came in 18% below expectations. While the auto sector volumes
remained strong, there was some weakness in non-contractual off-take partly
because the company held on to the price hikes take in Jan-Feb. The management
has said that the volumes, adjusted for seasonal variations, have been good in
1Q12 and the company has not taken any price cuts since Mar-11. Higher than
expected tax rate in 4Q led to a bigger 17% miss at net profit.
Capital raising approval – a positive step towards de-leveraging
The board’s approval for up to US$1bn capital raising is a positive sign given that
high gearing has been a key concern for Bhushan’s stock. The management plans
to raise equity in 3Q12, which if successful would help reduce BSL’s net
debt/equity from 2.9x currently to 1.1x. Rising capex for Phase-III expansion and
the recently announced 1.8mtpa CR mill would otherwise keep net debt/equity
high at 2.1-2.7x over FY12-14.
Limited 12m upside but strong return potential on 2-year view
Post recent run up in stock price, we see limited upside in Bhushan stock over the
next 12m. However, on a 2-year view, we believe that BSL offers the highest
absolute return potential in the Indian metals space if the Phase-III expansion
gets commissioned by end-FY13 and the steel industry environment does not
worsen materially. In Phase III, Bhushan will expand primary steel-making
capacity to 4.7 mtpa (from 2.2mtpa) and downstream steel capacity to 1.7mtpa
(from 1.2mtpa) by Oct-12. This will drive strong 38% volume and 40% EBITDA
CAGR over FY13-15. We believe that the stock will factor in Phase-III expansion
only after 12-18m given macro and execution risks as well as high financial
leverage. We will revisit our estimates once full details are available in the FY11
annual report; retain BUY.
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